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To what extent should your employer be able to dictate where you can work after you quit? In recent years, policymakers in a range of countries have come up with the same answer: not as much as they do now.
Their interest in this question has been prompted by academic research into what I call “the economics of small print”. The prevalence of non-compete clauses in employment contracts, for example, is now “surprisingly high”, according to a recent overview by the OECD. These clauses typically ban an employee from going to work for, or starting, a competing business within a certain period of time after leaving their job. And they appear to have spread quietly from well-paid jobs such as senior executives to badly paid ones such as fast-food workers and hairdressers. Interestingly, such patterns seem to hold in very different types of labour markets, from flexible ones such as the UK and Australia to more regulated ones like Austria and Italy.
Policymakers are paying attention. There have been moves in Australia, Canada, Finland, the Netherlands, the UK and some US states to prevent or restrict the use of non-competes, often on the grounds that they suppress mobility and wage growth for workers.
But one place is zigging while everyone else zags. In Florida, the state legislature has passed a bill that, if approved by the governor, would permit non-compete agreements that last a full four years. It would also make it easier for employers to get them enforced. Even in the US, the move would make Florida a real outlier. “Prior to this law, if any employer in any state in the US would have asked me, ‘Hey, is a four-year non-compete enforceable?’ I would have simply said, ‘No,’” Mark Konkel, a partner at Kelley Drye & Warren who specialises in employment law, told me.
What does Florida hope to achieve? The bill’s title offers a clue: it is called the Contracts Honoring Opportunity, Investment, Confidentiality, and Economic Growth (Choice) Act. Much of the legal analysis has described it as an “employer friendly” move to make Florida even more “wide open for business”. But to see stringent non-competes as straightforwardly pro-employer would be a mistake. It would be better to say that they are pro-incumbent employers. And what that means for economic growth is not straightforward.
The case for non-competes is that they protect workforce investments, client relationships and trade secrets. But they have long been unenforceable in California, which didn’t stop Silicon Valley becoming the innovation capital of the world. And, if you have a new company and you want to expand and hire good people, the clauses can allow incumbent competitors to hoard talent. The OECD report’s authors concluded that “the balance of evidence suggests that non-compete clauses suppress job mobility, firm entry, innovation, wages and productivity, which more than offset any gains from enhanced incentives for firm-specific investment”.
Indeed, there are signs that the forces of “creative destruction” have been waning in recent decades: business entry and exit rates have declined in the US and elsewhere, as have job-to-job moves. It is possible that non-competes have contributed to this trend, by preventing competition and fluidity.
John Lettieri, chief executive of the Economic Innovation Group, a think-tank that opposes non-competes, said he thought Florida was committing economic self-harm, even though the law would only apply to people who earned more than twice the annual mean wage. “Imagine taking some of the best human capital you have in your state, and putting it on the sidelines for four years,” he said. “The biggest economic harm in the long run is restricting the highest-paid talent.”
Konkel, the employment lawyer, said it remained to be seen how much employers would use the new law. “If you are about to join an employer and you know that in accepting that employment, you’re going to be compelled to sign a four-year non-compete, it is very hard to imagine very marketable people will just sign such an agreement without negotiation,” he said. While some firms like hedge funds might be able to pay enough to compensate, many other employers would probably wait and see, or “continue to take a more tailored approach”, he predicted.
Florida’s move on non-competes could be seen in the same way as its proposal to ease restrictions on child labour: interventions that might benefit incumbent employers in the short run, but with costs to human capital and growth in the long run. At least the economists who like to study the economics of small print have a new place to get their microscopes out.
